Sharp Fall in Overseas Investment By Chinese Firms

Chinese firms have become more wary of making big-ticket transactions overseas as the country’s once-a-decade leadership transition leads to a slew of policy changes and tighter credit.

The wind blows a red flag onto a Chinese honour guard outside the Great Hall of the people in Beijing on August 23, 2013. The value of outbound investment by Chinese firms fell by more than a third to $27.6 billion in the first half of this year as firms become more wary of investing overseas.

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The value of outbound investment by Chinese firms fell by more than a third to $27.6 billion in the first half of this year, compared with $41.5 billion in the six months ended December 2012, a recent report by PricewaterhouseCoopers LLP shows.

The country’s state-owned enterprises continued to outpace private firms in making purchases abroad, as private firms not only faced a slowing domestic market but also the challenge of getting local debt financing for acquisitions. China’s gross domestic product grew 7.6% on year in the first half, at its slowest pace in years, and some economists expect a worse performance for the remainder of 2013.

Since taking power last November, Chinese president Xi Jinping has sent clear signals that the new leadership is focusing on restructuring the investment-driven economy. The government’s goal of rebalancing the economy, however, is putting pressure on the economy in the short term, most notably with a surprise credit crunch earlier this June.

The drop in Chinese acquisitions abroad also comes as firms here are becoming more experienced in evaluating targets abroad. “Chinese companies are walking away from more transactions in the last six months than they have been in the past,” said Bob Partridge, managing partner at Ernst & Young. “They’re getting more experienced, listening to their advisors and evaluating post-merger scenarios.”

PricewaterhouseCoopers said in the report that the decline in outbound deals was “a hiccup” and that “steady growth, from what is still a relatively low base overall, will resume in the rest of 2013 and into 2014.” Still, Chinese dealmakers will likely continue to take a “cautious approach” in the second half of the year, they said.

In contrast, Chinese firms’ acquisition of assets on their home turf increased to $61.6 billion from $53.6 billion in the previous six months.

Foreign firms also increased their exposure to China, buying $6.9 billion worth of assets in the country in the first half of the year, up from $5.2 billion in the previous six months.

Buyers from Europe, including carmakers Volvo AB and Daimler AG, made the biggest acquisitions in China in the first half of the year. Sweden’s Volvo said it would buy a 45% stake in a new venture with China’s Dongfeng Motor Group Co. for 5.6 billion yuan ($920 million) this January, making a bet that a struggling market for big trucks in China will rebound.

Germany’s Daimler said it would invest another 640 million euros ($843 million) in its Chinese manufacturing partner BAIC Motor Co., the passenger-car unit of state-owned Beijing Automotive Industry Holding Co., this February.

In total, there were 2,118 inbound and outbound deals involving Chinese firms in the first half of 2013, down 5% from the previous six months. The total value of deals also fell 6% to $119.5 billion, according to PricewaterhouseCoopers.